If Labour forms the next government, as polls suggest, it must provide the private sector with the kind of incentives that will lift investment in Britain’s economy, making it more productive and environmentally friendly. Joe Biden has done it for the US. Why not Keir Starmer in the UK?
Transforming the economy will come at an outsize cost. Worse, it’s an escalating cost that is way beyond the public finances of Britain and possibly even the EU.
There is money on offer from the private sector: the world is swimming in cash looking for a home. It’s the demand for super returns that makes a much-needed upgrade of UK infrastructure – from hospitals to the electricity grid – look unaffordable.
Biden is finding this out. His Inflation Reduction Act (IRA), which is the US’s main vehicle for spurring a move to lower-carbon energy consumption, works alongside, and overlaps with, the Bipartisan Infrastructure Law and the Chips and Science Act, which boosts the US semiconductor industry, at a cost over 10 years of about $2tn (£1.57tn).
IRA subsidies and tax breaks on their own, which were originally estimated to cost $385bn, are, according to some analysts, on track to hit $3tn if the US reaches one of the legislation’s main targets – reducing the electricity industry’s emissions to 25% of its 2022 total.
To rival the US effort, the EU has put together the £600bn NextGenerationEU fund to finance the green and digital transitions. It sounds large but is stretched over 27 countries and will need to be supplemented by private funds to achieve its aims.
The UK, meanwhile, is taking a piecemeal approach with one-off subsidies that amount to a few billion pounds. Labour’s £28bn green investment fund is larger – if it is not scaled down any further before the election – and based on a more coherent industrial strategy, yet still looks puny in a global context.
That leaves the shadow chancellor, Rachel Reeves, like all her counterparts in the industrialised world, needing huge amounts of private capital to get investment moving.
The subsidies demanded by the owner of British Steel, China’s Jingye Group, and the Port Talbot steelworks owner Tata to switch from coal to electric furnaces have been eye-watering, and give a taste of what is to come.
Green bonds and infrastructure bonds, which generate money for projects that aim to reduce emissions, are seen as a significant funding source, but have proved to be very expensive and the price is likely to stay high, limiting their attraction.
Sadiq Khan, London’s mayor, has flagged a solution that is likely to become increasingly popular in government circles: offering credits in return for green commitments from the private sector.
That’s what the London climate resilience review, authored by former Environment Agency boss Emma Howard Boyd, suggests can be used to generate investment in the capital. In an interim report last week, she suggested offering credits to buyers such as private landlords, local authorities, or utilities companies such as Thames Water, if they undertake work at their own cost to produce “a measurable reduction” in the area of impermeable surfaces that exacerbate flooding.
These credits could last decades and be used to offset the bad behaviour of the buyer – say, the carbon-generating aspects of the business – as it seeks to achieve net zero.
Carbon credits have been around for some time and are not uncontroversial. The credits are based on markets that critics say price them too cheaply, meaning large industrial firms can afford to buy them and carry on much as before.
Howard Boyd says there are ways to make sure credits connected to infrastructure projects in London would not be abused. She also recommends further research into “financial models that create markets for investment in nature-based solutions”.
In the 1980s, the UK paid its way by selling – at a huge discount – dozens of state-owned assets, from North Sea oil and gas rights to British Telecom, BP and British Airways. In the 1990s came the privatisation of the rail network and National Grid. The Blair government, realising much of the past wealth had been sold, turned to the future, selling licences (to mobile phone companies) and long-term contracts, such as the ill-fated private finance initiative.
There is even less state cash to play with these days if we accept that entrenched political interests prevent reform of the tax system and that state borrowing has limits. It leads politicians of all colours to consider innovative ways to raise finance.
Infrastructure credits might work, but they can’t disguise the huge effort needed – expended today or tomorrow – to reach net zero.
